On January 16, Governor Sandoval delivered his budget, bidding good riddance to the bottom of the Great Recession. However, while most signs going forward are positive, projections of state revenue by the Economic Forum are still $400 million less than in the 2006-2007 biennium unless temporary taxes scheduled to sunset in FY 2014 are continued. Therefore, the state is again faced with extending temporary tax increases to fund a budget that funds most public services at lower levels than in 2007.
Containment of aggregate spending might indicate government as a whole is being “right sized”, made more efficient. That said, while total outlays have been curtailed, there is one program whose growth has continued virtually unabated since its establishment decades ago. Our ongoing inclination to pump money into Medicaid at the expense of other public services invites the question of whether the individual components of our state’s spending are in fact being “right sized”. This Public Finance Report includes economic indicators and offers thoughts on Medicaid in the context of the state budget and as part of Nevada’s fiscal evolution.
Taxable Retail Sales increased 7.1 percent in November, bringing the year-to-date gain to 5.6 percent statewide. Notably, increases in Clark and Washoe in FY 2013 now roughly mirror the statewide advance, as last year’s massive increases in rural counties have normalized for the present. While this increase is modest compared to peak years, that this trend has brought 29 consecutive months of gains in state sales tax collections is of some comfort as the 2013 Legislature convenes.
Gaming remains sluggish in the first half of FY 2013, posting 1.5 percent and 1.4 percent gains in win and percent fee collections, respectively. This modest performance is watched with concern, as McCarran International Airport passenger counts have decreased in four of the last five months at the same time as overall visitation and room occupancy have risen slightly. Certainly, the Las Vegas entertainment market has not lost its luster, but the thinning of flight schedules and pricing changes by domestic carriers have made access more challenging for tourists. These factors, coupled with volatility in high-end table play, support a conservative approach to projecting gaming revenue, as reflected in recent estimates by the Economic Forum for the state budget.
Employment trends continue to be favorable. The December unemployment rate dropped to 10.2 percent statewide, 0.6 percent lower than in November and 2.8 percent better than a year ago. Further, a reduction of 40,000 in the number of unemployed more than offset a contraction in labor force which would otherwise have increased the rate.
Despite gains in jobs, gross wages subject to Modified Business Tax were relatively flat through the first quarter of FY 2013; however, the slight uptick in health care deductions may hint that employers have stopped cutting worker health insurance. Although Modified Business Tax collections are thus far not outperforming those of last year, the fact that FY 2012 collections exceeded projections by $14 million means last year’s gain against low budget estimates could be replicated in FY 2013, further replenishing the state general fund.
Recent data for new home closings, pricing, and permitting show some life; but formidable inventories of vacant commercial space and fitful absorption continue to suppress construction employment.
As public revenues improve, many policymakers have enthusiastically cited education as their top priority for restoration of prior budget cuts. This is not surprising, as families and supporters of 490,000 students and 43,000 employees occupied in K-12 and higher education represent a considerable slice of Nevada’s electorate. As such, one might expect education to be holding its own in our state’s fiscal priorities; instead, Medicaid, the federally subsidized-state matched program of medical assistance to those in need, has been the consistent winner in Nevada’s budget battles. Unlike education, public safety, and public infrastructure, where funding can rise or fall with revenue cycles, Medicaid spending has grown steadily as a percentage of the state budget irrespective of economic conditions. Intuitively, Medicaid funding should be countercyclical, higher during downturns; but, its relentless advance against other public priorities under all conditions has been remarkable.
The Elephant in the Room
Medicaid is the second largest state general fund appropriation after K-12. In 1965, President Lyndon Johnson’s vision of a “Great Society” lit the fuse. Following passage of Title XIX of the expanded Social Security Act, the Nevada Legislature consolidated medical assistance for the aged, blind, and dependent children into “State Aid for the Medically Indigent”, the forerunner of Nevada Medicaid. In lieu of medical costs previously incurred by counties, an 11-cent property tax was levied for the state medical assistance fund. Even up to 1975, when the Legislative Appropriations Report was first published in current form, Medicaid consumed only 3 percent of general fund appropriations; and, adjusting for the now-repealed county tax, only 5 percent of in-state funding. In the bigger picture, all departments then classified under human services — state-supported public assistance — received 21 cents of every state dollar while K-12 and higher education received 58 cents of the same dollar, plus a much higher K-12 property tax rate in addition to state funding.
Forward to the Present – Today, Medicaid consumes 16 percent of all general fund appropriations, five times the percentage in 1975; and, counting “intergovernmental transfers” based on county contributions, roughly 21 percent of in-state funding. Human Services as a whole now controls 29 percent of the general fund pot, while education is diminished to 55 percent. This trajectory may continue, as the FY 2014 – FY 2015 budget before the Legislature maintains Medicaid’s general fund share despite the easing of the recession; and treating local money as in-state contributions, increases that share to 22 percent of in-state funding. Human services as a whole are slated to increase to 32 percent of the general fund, while education slides further to 53 percent. It should be noted that a portion of the increase in human services overall is attributable to organizational changes.
While some might point out repeal of the Medicaid property tax in 1979 justified allocating more state funds to Medicaid at the time, that action has been offset by replacement of the Medicaid property tax with “intergovernmental transfers” levied disproportionately against Clark County. Hence, changes in taxation policy are not the underlying cause of this transfer of state general funds.
Unlike the education lobby, which remains rooted in a largely non-voting age demographic, Medicaid has grown its constituency by raising income thresholds and including more variations in household composition and individual status.
Nevada’s K-12 student enrollment is 435,000, about 16 percent of our population. Adding full-time equivalent college and university students brings the combined student-based population to 18 percent – virtually unchanged over the years. While the percentages directly touched by education spending remain fairly flat, Medicaid enrollees, now over 300,000, are by 2015 projected to exceed 400,000 with the insurance mandate in the Patient Protection and Affordable Care Act, and approach 500,000 if the state decides to accept federal money under the Act for opening Medicaid to certain persons currently ineligible by virtue of their income. This particular funding does not require state matching in the near term, but will in the long term. While this might raise a cringe factor for some officials, the short-term fiscal benefit could influence the debate.
Recipients of medical care are not the only beneficiaries. Over 19,000 vendors of medical services and products count on Nevada Medicaid for a portion of their revenue, and discharge statistics for both public and private hospitals reveal heavy reliance on government programs including Medicaid. In 2011, 38 percent of patients at University Medical Center of Southern Nevada and 26 percent of patients at Sunrise Hospital and Medical Center were paid for by state Medicaid or a Medicaid HMO. That the latter hospital operates for-profit is telling.
Even in Nevada, where fiscal caution is central in public discourse, the critical mass of support may be shifting to Medicaid – for some, the very antithesis of self-reliance. The number of beneficiaries to be served, coupled with a community of medical providers whose bottom lines are squeezed by nonpaying patients and constricted reimbursement rates, may soon outweigh the influence that once belonged to education.
Medicaid’s most ardent supporters generally believe health care is a right for all. Moderates generally believe means-based medical assistance is a societal necessity. The harshest critics believe Medicaid constitutes tax-funded vote-buying on the road to ruin. In the long run, it’s all a numbers game. Place your bets.View Report »
Over the past year, increases in consumer spending and tourism have brought some optimism back into the public discourse. We might even be persuaded the state's budget woes are over and service levels enjoyed before the Great Recession can be restored. However, while Carson City could be less contentious in 2013 than in the past several legislative sessions, the depth of the recession combined with the nature of Nevada's taxation system will likely prevent full recovery of lost public services. The figures cited in this report are merely hypothetical extrapolations from current revenue levels, and are presented only as general orders of magnitude to highlight some major components of the state budget. These figures will certainly change, perhaps materially, as the state budget is formulated between now and June 2013; but the issues identified here will remain relevant.
The Good News - Taxable Retail Sales
FY 2012 taxable sales surged 7.6 percent above FY 2011 levels, yielding a $41 million gain in general fund revenue against projections. When combined with state cost avoidance due to offsetting sales taxes received by school districts, the state's total gain was about $95 million through June 30, 2012. Receipts so far in FY 2013 indicate this pattern may be continuing, giving rise to expectations of a biennial windfall approaching or exceeding $200 million from sales taxes alone - a favorable scenario for those hoping to restore painful budget cuts, especially since retail trade is somewhat more sustainable than some other elements of the state's revenue system.
Private Sector Payrolls and the Modified Business Tax
The fact that FY2012 Modified Business Tax (MBT) collections exceeded earlier estimates by $14.6 million is more a reflection of low projections in the budget than of material recovery last fiscal year. Underneath the gain over projections, FY 2012 receipts were actually $12.1 million or 3.2 percent less than in FY 2011. That said, payrolls have recently shown signs of modest growth and September's seasonally adjusted unemployment rate fell to 11.8 percent, a significant drop from 13.6 percent a year ago. More Nevadans are working, fewer are unemployed, and the shrinkage in unemployment is at least for now exceeding the reduction in labor force, reversing the troubling relationship which recently existed between the two indices. Taken together, these observations give some support to notions that FY 2013 collections will again top earlier predictions, and that private sector payrolls could return as a reliable revenue base for public services. Those now doing the arithmetic in their heads might be adding at least a $30 million biennial gain in MBT through June 2013 to the possible $200 million or more in surging sales taxes estimated above.
More Good News - But With Strong Caveats
Sales taxes were not the only state revenues to exceed projections. Net Proceeds of Mines payments were $39 million higher than earlier estimates, and state unclaimed property collections were $16 million greater than expected. Unlike sales taxes, however, these revenues are not driven by the Nevada economy, but by the global pricing of minerals and the abandonment of bank deposits, securities and other property - events which are not reliable for financing ongoing public services. Counting on the unclaimed property program to fund services is the equivalent of looking under furniture for spare change to pay bills. Sound fiscal practices speak strongly against committing gains in such unpredictable revenues to the restoration of services, but temptations to the contrary may arise.
Gaming - Slower to Recover
FY 2012 unrestricted gaming win rose only 1.3 percent while percentage fee revenue was virtually flat, falling well below even the modest 2.7 percent increase assumed in the state budget. Early FY 2013 collections have been too volatile to reflect a meaningful trend, so industry observers remain cautious regarding the Nevada market. Visitor counts have grown more modestly in calendar 2012 than in 2011 - 1.8 percent year-to-date compared to 4.3 percent last year. That said, the continuing rise in visitation and the fact the Las Vegas market is still on track to push or top an unprecedented 40 million visitors is encouraging for retail activity, if not yet for gaming.
One Scenario for the 2011-2013 Biennium
If a hypothetical gain of $200 million sales tax revenue is added to an advance of $30 million in MBT, and if the combined one-year windfall of $55 million in Net Proceeds of Mines and unclaimed property is considered nonrecurring, and if all other factors are held constant, the state presumably would be at least $285 million ahead of projections in general fund balance as of June 30, 2013. That amount would represent a surplus if the state budget was all real money, but it is not. In the legislatively approved budget, $157 million of the total $163 million general fund balance was a plugged number representing planned borrowing from local governments - cosmetics to show the budget would carry a required 5 percent balance. Because cash flows have been sufficient, the borrowing has not taken place; and, unless it does take place, the first $157 million of any windfall from excess revenue or expenditure reduction this biennium would go to meet the required surplus threshold, not to the state's bottom line.
Eye-rolling accounting aside, what would happen if a real one-time surplus of $285 million were to materialize? From the 1960's through most of the 1990's the state's practice was to apply windfalls to capital projects, avoiding both interest costs and the perils of committing nonrecurring funds to recurring expenses. That policy has effectively ceased in the current millennium in favor of borrowing money for buildings while distributing surplus dollars to government and private organizations providing services. Further, strong arguments can be made that the balances in the state general and Rainy Day funds should be higher; as, for example, $285 million represents only about 9 percent of annual appropriations, hardly more than one month's operating money. The sobering reality is that spending money can attract more popular support than conserving it, so many are betting that a budget entry for borrowing money will remain in play, since its effect so far has been to release real money for expenditure without requiring a corresponding tax increase. The votes to augment fiscal reserves will be hard to gather.
Outlook for the 2013-2015 Biennium
Assuming any surplus generated during this biennium is directed exclusively to capital or other one-time expenses, or to create real reserves, it is still possible that retail sales and payrolls have found a new base from which to grow in future. Here, for the sake of argument, suppose the present gains in Net Proceeds of Mines and unclaimed property are either not repeated or are applied only to one-time purposes and that gaming will remain flat. If another $230 million in current dollars materializes in the next biennium, what could it finance? The possibilities may at first be inviting, but $230 million pales in comparison to the $824 million in real dollar cuts inflicted on K-12 and higher education combined between the 2009 and 2011 legislative sessions. Early indications are that lapses of unused spending authority are adding further to the general fund balance, augmenting the reported advances in the major revenues, but some combination of revenue increases and or accumulation of unused spending authorization would have to virtually triple the gains seen so far from sales and payroll taxes in order to restore K-12 and higher education to funding levels approved three years ago. The magnitude of these unmet appetites is not lost on experienced policy makers, and early reports that roughly $380 million in cumulative salary and benefit cuts to state-funded employees, plus millions more for federally-funded state employees, might be restored are now being heavily qualified. While state employees' salary and benefit reductions do not represent service reduction per se, the fact these reductions have been in place four years while local government salaries subject to collective bargaining have not been nearly as affected is a serious consideration in terms of equity.
Could this still happen? Could the numbers shift enough to get us back to 2009? Possibly, but it has not happened yet.View Report »
Current Economic Indicators and the State Budget
Retail Sales - Nevada's taxable sales are outpacing the estimates on which the state budget was based, increasing 10.4 percent in May and a robust 7.5 percent for the fiscal year to date; but, aggregate numbers don't tell the entire story. In Clark and Washoe counties the combined increase has been only 6.5 percent, while the other 15 counties have advanced 13.9 percent - the greatest gains being attributable to non-recurring and cyclical sales in utilities and mining. If taxable sales grow at the current rate reported in June of FY 2012, the state will gain over $95 million against legislative sales tax projections for general fund deposits and offsets in state payments for school districts. Even if retail growth is flat for the final month of FY 2012, the state budget will realize at least $85 million in sales tax relief this year; and a continuation of this trend would further enhance state revenues heading into the 2013 Session of the Legislature.
Gaming - Total non-restricted win declined 10.1 percent in May over the same month in 2011, dragging the gain down to a mere 1.3 percent for the fiscal year, while gross gaming fee collections, which track win over the long term but not month-to-month, were virtually flat, falling well short of the 2.7 percent advance projected in the state budget. The news for June was no better, as win declined 6.0 percent over the same month last year. Although present trends in gaming revenue are not nearly as negative as they once were, the fact collections are not meeting conservative predictions is a material concern.
Tourism - Visitor counts have grown more slowly in calendar 2012 than in 2011 - 2.4 percent compared to 4.3 percent. Of note, McCarran International Airport passenger counts have increased 1.9 percent for the calendar year-to-date, and the new Terminal 3 will be closely watched for any discernible effects on aggregate traffic and its origins.
Employment - Statewide seasonally adjusted unemployment remained at 11.6 percent in June, 2.2 percent better than in 2011. Just as Nevada's unemployment rate rose faster than the nation's during the Great Recession, it is now falling faster. Year-over-year job creation accelerated, from 4,000 as of the last Public Finance Report to 12,400 as of June. Although the number of Nevadans seeking employment is falling, and the number employed is rising, the total labor force - the sum of the two statistics - is no cause for celebration, as the number of jobs being created has not kept pace with the number of persons no longer receiving benefits. Leisure and hospitality continues to lead all sectors in this spotty recovery, followed by professional and business services and education and health care. Government, a relative latecomer to the Great Recession in terms of position cuts and actual layoffs, shed more jobs in the last twelve months than any other sector.Nevada's Economy and Local Government Finances
Although total state revenue has risen visibly, such is not the case for Nevada's largest local governments. Like the state, local governments are benefitting from the improvement in taxable sales; but, unlike the state, local entities have been far more exposed to the massive drops in property values, the dearth of development, and labor mandates.
Local Sales Tax Revenues - Consolidated Tax (CTX) consists primarily of sales taxes. As the freefall in retail subsided in FY 2011, Clark and Washoe counties and Nevada's five largest cities realized a combined 4.2 percent year-over-year gain in Consolidated Tax receipts, or $34.7 million. However, even after this modest gain, Consolidated Tax collections were $264.0 million less than in the peak year of FY 2006. If the present recovery in retail continues with similar advances in other CTX revenues, receipts for Nevada's major local governments will still not reach FY 2006 levels until FY 2015.
Although school districts are called "local governments" in statute, their sales taxes are actually directed by the Legislature, which uses all K-12 sales tax revenue to reduce the amount the state would otherwise pay in support of public education. The effect is the same as if all school sales taxes were deposited to the state's general fund. Thus, school districts' fiscal condition will not improve, even if taxable sales skyrocket in the next year.
Most local governments have scaled their budgets to accommodate lower sales tax revenues, but recovery in retail activity is not the only fiscal issue facing these entities.
Property Taxes - While local governments other than school districts are sharing in the stabilization of retail activity, such is not the case for property tax receipts, which have fallen off nearly as much as retail sales did at their lowest point. For Nevada's largest local governments, the bottom in property tax revenue has not yet been reached. In just two years from FY 2009, when receipts peaked, to FY 2011, the last audited year, receipts fell $405.1 million; and they continue to fall, with additional projected losses of $94.1 million and $73.7 million in FY 2012 and 2013, respectively. By the end of FY 2013, the loss from peak levels can be projected at $572.9 million. These projections are subject to change, as FY 2012 audits are not due for several months and appeals, delinquencies, and addition of property to the rolls will certainly affect the FY 2013 outcome; but, the lack of new development does not offer much prospect for growth.
To some extent, the state budget is also vulnerable to declining property values. Unlike local governments, however, the state has the option to reduce its fiscal risk. The state's exposure exists because state payments to school districts "float" inversely with K-12 property tax receipts. However, if the Legislature chooses, the state can immunize itself against nose-diving property values by modifying its bottom-line K-12 expenditure target to reduce the state's general fund obligation. This maneuver can be, and has been, performed prospectively, when property tax revenue is estimated for future years; or retrospectively, by legislative rescission of K-12 fiscal benchmarks.
Development - Local governments must provide water, wastewater, local streets, and other facilities not constructed by the state to keep pace with population, obsolescence of infrastructure, and in some cases environmental issues. Fulfilling these obligations often requires debt financing based on expected rates of growth. During the past year, strenuous challenges in financing water and wastewater facilities have prompted local boards in both large and small communities to consider significant changes in financial structure, including rate increases, surcharges, and other mechanisms to meet existing debt loads and complete promised projects. Further, some cities have encouraged development to enhance their local economies; but, several retail districts have encountered fiscal difficulty, and some municipal debt is in various stages of default.
Labor Issues - The state mandates that local entities bargain a lengthy list of workplace issues with labor groups ranging from wages to, in some cases, even transfer policies. Notably, the state has not adopted this mandate for itself; the closest brush coming in 1991, when collective bargaining for state employees passed the Legislature but was vetoed. Exercising a level of flexibility not available to local governments, the state was able to unilaterally impose furloughs and salary reductions on its employees starting in 2009 and continuing to present. Some have asserted local governing boards have been too accommodating to their employees. That said, these labor contracts were bargained under laws passed by the Legislature. They add a layer of complexity and expense, and finding agreement on concessions can be a significant and often costly challenge.Prognosis for Nevada State and Local Government Fiscal Affairs
Since 2008, the state has legislated its way through fiscal potholes with temporary taxes, self-assigned borrowing authority, and diversion of local revenue (subject to constitutional limits); whereas local governments have less latitude. When the 2013 Legislature convenes, the proposed state budget is likely to be the most optimistic since 2007, before the economy caved in; but around the state, Nevada's largest local governments may still be digging out from under.View Report »
Current Economic Indicators
Statewide taxable sales increased 4.8 percent in January over the same month in 2011. Notably, the statewide surge exceeded that in Clark County, indicative of continued expansion of utility facilities in rural Nevada. All major categories advanced except construction. While the latest percentage gains are not as large as those posted in the final months of calendar 2011, the fact these recent increases are now compounded against similar increases in the prior year is encouraging; and, even if taxable sales growth subsides and is flat for the remainder of FY 2012, the state will have gained roughly $50 million against legislative projections in sales taxes alone, combining general fund deposits and offsets to state payments to school districts.
Gaming win for non-restricted licensees grew 5.7 percent in March over the same month in 2011, raising the year-to-date gain to 4.0 percent. Gross gaming fee collections, which track win over the long term but not necessarily month-to-month, increased 4.4 percent year-to-date, closely matching the percentage increase in win, largely because credit extended for January table game play - including Chinese New Year - is now being collected. Although the actual year-to-date percentage increase now slightly exceeds that projected in the state budget, month-to-month volatility in this revenue makes upward revision of previous estimates less certain than for taxable sales.
The steady recovery of southern Nevada's tourist economy continues. Throughout calendar 2011, the combination of higher room rates and 4.3 percent increases in visitor volume and McCarran International Airport passenger counts boosted room tax collections by the Las Vegas Convention and Visitors Authority (LVCVA) 18.6 percent over 2010. Although tourist counts were flatter in January 2012, LVCVA room tax collections still increased 7.7 percent for that month on price alone. The advance in tourism resumed in February, as visitor volume increased by 6.4 percent and McCarran passenger counts by 6.6 percent. These statistics represent the largest increases in the past twelve months.
The statewide seasonally adjusted unemployment rate fell to 12.3 percent in February, a 1.3 percent improvement over the previous February. The fact there are 4,000 more jobs now than 12 months ago is a sign that Nevada's resident consumer base is gradually expanding. However, beneath these indicators lies a nagging decline in the labor force over that period; and fitful recovery in the jobs market remains a concern, both in Nevada and nationally. Leisure and hospitality continues to lead the sporadic improvement, while construction lags all sectors.Restoring Infrastructure Budgets
Governor Brian Sandoval's announcement of his recommendation to extend the sunsets on the state's temporary taxes was lauded by some as politically astute and criticized by others as a denial of need to revamp Nevada's public revenue system. This divergence of opinion among policy makers arises largely from their various perspectives regarding spending levels for education, Medicaid, and other human services - the largest components of the state budget. In terms of popular resonance, the Governor's message was far-reaching, as these very public services affect 420,000 K-12 students, their parents and guardians, 40,000 teachers and school employees; 65,000 FTE higher education students (105,000 individual headcount), over 300,000 recipients of Medicaid and other assistance, and 20,000 state employees who will have labored under mandatory furloughs for four years. The importance of these constituencies in the electoral process is not lost on observers; and the prospect of at least stable, if not abundant, funding moves the starting point for the 2013 legislative session.
Certainly, as state revenues trend from deep declines to modest increases, the human face of these key services will be front and center when restoration of budget reductions is considered. However, what is missing so far is sufficient mention of that governmental function which is equally critical to the public and which, on a percentage basis, was cut more deeply during the Great Recession than either education or human services. That function is the provision and maintenance of public infrastructure - capital.
Conceptually, "capital" encompasses development and stewardship of assets to fulfill an organization's mission; and, in the public sector, it generally refers to infrastructure serving the common good. Financing capital projects has been a fundamental public function since our nation's beginnings. More than a century before the advent of Social Security, Medicaid, and Medicare - and decades before all states had free public schools - the federal and state governments saw the need to connect communities by funding such major works as the Erie Canal and the Cumberland Road, common wells were dug in developing towns, and the first transcontinental railway was completed with federal financial and logistical participation. Although direct financing of improvements for public ownership receives greater attention, government also supports private investment in publicly accessible infrastructure through franchise agreements, tax treatment of certain bonds, redevelopment districts, grants of land and rights-of-way, and other mechanisms.
Furthermore, government-sponsored facilities are vital to commerce. Whether infrastructure is constructed and operated by public entities or by private organizations with government cooperation; transporting people, goods for sale, or raw materials might, at best, be inefficient and chaotic; as would telecommunications or waste disposal. Criticism of public agencies notwithstanding, the extreme alternative of having all infrastructure provided and operated exclusively by private entities without any restrictions could cede disproportionate power to those holding assets which separate willing sellers from willing buyers.Public Infrastructure in Nevada's State Budget
In 2005, before Nevada's economy cratered, the Legislature approved $735 million for Nevada Department of Transportation project funding and $419 million in State Public Works Board non-transportation projects. In contrast, the 2011 Legislature authorized $697 million in Department of Transportation project funding and only $53 million in Public Works Board non-transportation projects. These comparisons support recent statements by local and state transportation officials that federal and state highway revenue, based largely on per-gallon fuel taxes, is not rising sufficiently to fund necessary construction. Worse yet, funding for non-transportation projects - property tax-backed bonding and general fund appropriations - declined even more. Evaporating property values reduced state bonding capacity 88 percent, from $225 million in 2005 to just $27 million in 2011; and because of declines in sales and gaming taxes, state general fund allocations were cut from $84 million in 2005 to absolute zero in 2009 and 2011 - scorched earth for four years. Regardless of how these percentage declines are calculated, no major state-supported public service has been reduced more than capital outlay for infrastructure.
Even without population growth or economic expansion, every building, road, waterway, roof, cooler, or computer has a finite useful life which requires replacement or periodic refurbishment; and every government asset placed into service represents a promise of continued functionality to the taxpaying public. This reality aside, total state funding for non-transportation maintenance projects in the current two-year budget was established at only $45 million, including bonds and other sources, while accumulated depreciation of capital assets of the state and Nevada System of Higher Education (NSHE) increased by $168 million in FY 2011 alone. Therefore, on an annualized basis, it could be said the state's two-year capital plan is now funding less than 15 percent of annual depreciation - not a good sign.
The state is not alone. A review of local government financial statements and capital improvement plans shows some are not replacing their capital assets as fast as they are deteriorating. In some cases, 2012 project plans total less than 2011 deprecation; and, in the extreme, some reflect actual net reductions in total capital assets - another troubling sign.Why Is Continuing Investment in Infrastructure Important?
Arguably, people take priority over building and roads; and some might believe that infrastructure funding can rely entirely on sporadic revenue surpluses or on borrowing. When tax revenues fall, fiscal flexibility is invariably sought through deferral of capital projects, as those might be postponed, while payment of teacher salaries cannot. However, there is a stark difference between strategic deferral and systemic denial of need; and Nevada's policy cannot continue to drift toward the latter absent consequences.
This issue goes well beyond responsibly fixing what we already have. In planning for the future, we should acknowledge the economic benefits that railroads, Hoover Dam, and the Interstate Highway system brought to Nevada; a state which, absent these developments, might still be inaccessible to the outside world. The infrastructure that will enable tomorrow's commerce will be of a different nature; but, if Nevada does not position itself among those states prepared to welcome tomorrow's economy, an opportunity will have been lost, and the welfare of Nevada's people will not have been served.View Report »
Current Economic Indicators
Doubts regarding the stability of consumer spending are gradually dissipating, as statewide taxable sales increased 9.6 percent in November over the same month in 2010. Although a material portion of this increase is attributable to massive outlays for utility infrastructure, the bread-and-butter categories of food and beverage, clothing, and motor vehicles also posted gains beyond expectations. The 8.5 percent advance in taxable sales to this point in FY 2012 is welcomed relief from the double digit declines of 2009 and 2010.
Gross gaming fee collections, however, are not as robust as retail sales. Even including November, the month of the heavily-promoted Pacquiao-Marquez boxing match, gaming win for both calendar year 2011 and FY 2012 to date have each increased only 1.1 percent over last year, while actual FY 2012 fee collections in the state general fund lag legislative projections by 2.4 percent.
This dichotomy of strengthening retail sales concurrent with slower growth in gaming win departs from previous patterns in which the two indices generally moved in tandem. In both FY 2011 and 2012 to date, retail activity has grown faster than tourist visitation, while gaming win has grown slower. In December, Las Vegas visitor volume rose 2.5 percent from the previous year, pushing final 2011 counts 4.3 percent ahead of 2010. The fact that McCarran International Airport passenger counts also increased 4.3 percent in 2011 is a favorable reversal from 2009 and 2010, when the visitor mix tilted toward value-oriented drive-in traffic. That said, it is evident today's tourists have, for the present, steered their spending toward retail and away from gaming; a trend worth watching by those deliberating economic growth and future fiscal policy.
In the aggregate, the jobs market is improving. The statewide seasonally adjusted unemployment rate fell to 12.6 percent in December, a 2.3 percent improvement over the previous December; but underlying weaknesses persist. While unemployment fell by over 31,000 in the past year, the total labor force declined by 17,000 over the same period, highlighting the fact that retrenchment in the labor market is not entirely over. The strongest gains in employment over the last year occurred in leisure and hospitality at 9,800, education and health services at 3,000, and professional and business services at 2,800 jobs, respectively. Even including these comparatively bright spots, all industries in total grew only 3,500 jobs, meaning the remaining sectors continued shedding employees. Although continued weakness in residential housing prices and commercial real estate are expected to keep construction demand near historic lows for at least the near term, signs of stabilization in these markets, though at drastically reduced values, indicate that large job losses in construction are behind us. The good news may be the bleeding has stopped; albeit for lack of further blood to lose.Study on Distribution of Taxes to Local Governments
Since the 1960's, Nevada's local government tax policy has morphed from a largely point-of-origin approach to a highly centralized, state-directed system. Gone are the days when counties, cities, school districts and other local jurisdictions directly governed the great majority of property tax rates. Over time, the Legislature has replaced property taxes with either state appropriations or with state-levied sales taxes distributed in a fashion intended to mimic the former distribution of property taxes. Together, these changes transferred most determination of tax policy from the local level to the Legislature.
In 1999, the retail sales taxes, which replaced property taxes, were combined with five other local revenues, and the "Consolidated Tax" ("C-Tax") formula was born. This state-administered formula was modified in 2001 based on assumptions that property values grow every year, assumptions since proven wrong. Recently, reductions in property values (which in part drive an entity's percentage of distribution) combined with declines in sales tax revenues (which reduce the total amount distributed), produced a perfect storm in which actual tax allocations became decoupled from relative growth, particularly in Southern Nevada. In response, the formula was suspended in Clark County until FY 2014, and Assembly Bill 71 called for yet another study of C-Tax.
While the genesis of this C-Tax study was the distribution within each county, questions have also been asked regarding the distribution among counties. If the latter becomes part a substantial part of the discussion; regional differences may arise in the 2013 session.Study on K-12 Funding
A considerable body of case law virtually prohibits flat funding for K-12 students within a state for several reasons. First, nearly all states require local taxes to support a portion of costs; and since tax bases such as property and sales vary within a state, flat state grants not adjusted for local variations would allow disparate educational opportunity. Second, diseconomies of scale experienced by Nevada's smallest counties, if not taken into account by formula, disadvantage those counties' school districts which experience higher per-student costs in delivering instruction. Further, federal law mandates, but does not fully fund, additional costs for students with disabilities; and these students require more intensive teacher ratios and ancillary services - hence, higher costs.
Nevada's K-12 education financing system adjusts funding for different local tax yields, district size, and student disabilities, and has heretofore been considered "equitable" (not necessarily "adequate"). However, it also transports large amounts of tax revenue from Clark County to other counties - between $50 million and $90 million annually in recent years - creating mammoth differences in per-student funding among counties.
The 2011 Legislature authorized study of a "New Method for Funding Public Schools", and a legislative subcommittee received testimony at its first meeting January 24th. However, the Legislature appropriated no funding for consultants. Thus, unless private resources become available, this effort may be reliant on information provided by school districts and legislative staff.Study on Higher Education Funding
The University of Nevada Reno (UNR), revered as "Nevada" by its loyal supporters, was founded in 1874, long predating the University of Nevada Las Vegas (UNLV), which began as a two-year institution in the 1950's. Various fiscal legacies, including long-standing graduate programs, differences in the number of tuition-paying out-of-state students, and historical legislative tendencies to preserve the base of current funding have resulted in less state support per student at UNLV than at UNR, with similar outcomes for community colleges. This, coupled with the Legislature's use of tuition revenue to offset state appropriations, is perceived by some as (1) unfair to the majority of students in the system, and (2) a disincentive to more selective admission policies which might elevate academic performance. Representatives of the Nevada System of Higher Education have so far cast these issues in context of a need for more independence for the Board of Regents in policy decisions, and a refreshing dialogue regarding the possibility of funding based on student progress and completions instead of mere headcounts has emerged. Always in the background, however, are regional sentiments.Where are These Studies Headed?
On first consideration, it might seem Clark County's legislative majority could easily redistribute revenue if it so chose. Not necessarily so. First, there is history. Each of the last two major revenue re-distributions by the Legislature - establishing the K-12 funding plan in 1967, and the "Fair Share" sales tax modification in 1991 - included tax increases to either mitigate loss of revenue or to "level up" differences among entities. Second, partisan differences, even among legislators from the same county, are exponentially complicated by the supermajority requirement for enactment of additional revenue, a mandate which today draws many important bills into its vortex when otherwise unrelated issues become linked in the final give-and-take. The supermajority requirement, which did not exist in 1967 or 1991, raises the bar for enacting reform; and any bets on revenue redistribution, irrespective of justification, are highly speculative.
This is the price paid for a system sold as protection from tax increases, but which increasingly pervades the legislative process in other matters, strongly favoring status quo. You can't get there without the votes, and the minority patrols the threshold for passage of reform. We'll see.View Report »
There are three ways to address budget shortfalls - to cut expenses, to raise revenue; or, less finite and more hopeful, to bank on "growing" out of deficits through economic recovery. Gathering political support for either of the first two can be daunting, but virtually everyone hails the prospect of economic recovery. What would recovery look like in the context of Nevada's state budget? Some might define it as merely the cessation of further decline in public revenue; while others may define it as restoration of revenue levels enjoyed before the deepest recession in 80 years. Though this discussion is in context of the state budget, it also serves as a surrogate for challenges faced by counties and cities, since the same economy drives state and local fiscal affairs.Current Economic Indicators
The Nevada economy is showing faint signs of recovery, but the indicators are still too mixed to warrant unbridled celebration.
Taxable sales continue to rise modestly. After the calamity of FY 2009 and FY 2010, in which sales tax revenues fell in 22 out of 24 months, Nevada enjoyed increases in every month of FY 2011, ending the year with a 5.7 percent overall gain; and, the first two months of FY 2012 produced a 5.2 percent increase over the same months in FY 2011. This is good news. However, these advances should be viewed with some caution, as construction of utilities in rural areas has been a strong factor in the returns, and increases in Clark and Washoe counties have recently lagged the statewide average. Finally, if last year's growth rate were to continue unchanged, Nevada's sales tax revenue in 2016 would be the same as in 2007, a stark reminder of the size of the "bubble".
After finishing FY 2011 with a 3.3 percent gain over the previous year, year-to-date gross gaming fee collections have declined 5.5 percent in FY 2012, largely from baccarat play on the Las Vegas Strip, a component of gaming revenue which can swing widely from month to month. The outlook for gaming as a whole is generally toward gradual, though fitful, recovery. If last year's growth rate were to continue unchanged, Nevada's gross gaming fee collections in 2018 would be the same as in 2007, giving further pause to notions of restoring public services to pre-recession levels.
While gaming revenue continues to be viewed with some wariness, other tourism measures have shown steady signs of improvement. In September, Las Vegas visitor volume increased once again for a 4.7 percent year-to-date gain over calendar 2010. McCarran International Airport passenger counts increased 8.7 percent in September, the ninth consecutive month of advance, boosting the year-to-date gain to 4.5 percent.
In September, Nevada's unemployment rate remained flat at 13.4 percent, seasonally adjusted; with total employment also virtually constant. Slight gains were made in leisure and hospitality and construction, the latter of which may be an early sign of hope that the bleeding may have stopped in the hardest-hit industry. Looking ahead at construction demand, the number of new home closings, though still anemic by historical standards, has risen more than twice as fast on a percentage basis than closings of existing homes since the beginning of the calendar year, a trend worth watching as we await any hint of housing recovery. On the dark side, however, the commercial market offers little prospect for construction employment, as vacancy rates crept higher in the third quarter, to 25.2 percent for office and 10.8 percent for retail, and fell slightly to 18.0 percent for industrial space. Rental rates in all three sectors continue to fall.
In September, the median closing price for existing single family homes rose slightly to $104,200, 11.5 percent less than last year, and 63.8 percent less than the peak level in 2007. Of note, new home closings rose slightly as a percentage of total closings for the month, to 7.4 percent compared to 5.7 percent in May, as cited in the previous public Finance Report. Comparisons of closings and pricing between new and existing homes will continue to be watched, as both investors and potential owner-occupants contemplate their next steps.Status Quo in the Near Term
Only six months of tax receipts has been processed since March, when revenues were last tallied for legislative projections. While it is far too early for predictions, some preliminary observations may be made.
Looking past the plethora of temporary revenues, Rainy Day Fund transfers, fiscal diversions, and borrowing authority enacted to make the state general fund appear "balanced"; if that portion of the revenue structure which is not scheduled to expire grows only at its present rate, it appears unlikely Nevada can avoid another gap between current expenditures and permanent revenue in 2013. Taxable sales, gaming, and the remainder of the tax base would have to recover nearly twice as fast as they have in the past year to equal or exceed the amount of budget gimmicks under which we now operate. Accordingly, chances appear slim that such measures will be found altogether unnecessary in 2013, absent some form of revenue enhancement - a tax increase - or more expenditure reductions. Given the sluggish jobs and housing markets, there is as yet no compelling evidence to suggest such an increase in existing public revenue will materialize, and these gimmicks, or successor gimmicks, may be in play once again.A Foundation for Long Term Economic Development
Nevada's historical approach to economic development has been both credited for the state's historical rate of growth and reviled for its reliance on a single selling point, low taxes. The most caustic criticism came from those who saw the preexisting system as a clearinghouse for awarding tax breaks to businesses unworthy of such benefit.
Governor Brian Sandoval's opening message to the 2011 Legislature emphasized the need to redouble Nevada's economic development efforts; and the Legislature responded by passing Assembly Bill 449, creating the Board of Economic Development to include voting representation of the Governor, Lieutenant Governor, and Secretary of State, private sector members appointed by the Governor and legislative leadership; and nonvoting members representing the Nevada System of Higher Education and the Nevada Department of Employment Training and Rehabilitation. The Governor or his designee will chair the Board, and the Governor has appointed the Executive Director of the Office of Economic Development within the Governor's office. While the organization may seem complex, its objectives appear clear - to elevate economic development as a core function of the Governor's office, to give legislative leadership a say in the direction of the agency, and to involve those who provide higher education and who bring a high level view of the job markets.
In addition, the Nevada Catalyst Fund was created, and $10 million was provided for grants, loans, and other uses intended to foster economic development. The legislation also allows acceptance of other monies to augment these efforts. Notably, the Catalyst Fund has not been scheduled to revert to the general fund at the end of any fiscal year - a status accorded to only the most sacrosanct of appropriations.Conclusion
Status quo is not encouraging. Nevada has a narrowing tax base and is reluctant to tax to the level of our wants or cut expenses to the level of real revenue. The state's economy has at last proven even more vulnerable than others, and yet the state continues to rely on temporary revenue in support of basic, recurring services. Today's fiscal imbalances will not be solved if today's tax base and economy are held constant. Lawmakers have not been able to change the former; but, as stated, the concept of "growth" is more easily digested than cutting costs or raising taxes, and policy makers have agreed on some form of substantive change. A new framework for economic development is now taking form. Let us hope that those lofty ideals can be translated into tangible results.View Report »
This Public Finance Report presents a preliminary assessment of the K-12 budget approved by the 2011 Legislature. Of particular interest is the effect of the compromise struck at the close of the session resulting in partial restoration of the budget reductions recommended by the Governor prior to the May 2, 2011 meeting of the Economic Forum and the May 26, 2011 Nevada Supreme Court decision, each of which contributed to resolution of the impasse over school funding.
Some have characterized the final funding compromise as highly favorable to school districts, as it included an increase to state basic support per student, while others have said school district budgets must once again be reduced, perhaps resulting in layoffs of personnel. While these views may at first seem mutually exclusive, in fact they are not.
In a political environment, the intricacies of Nevada's K-12 budgeting system offer ample opportunity for selective citation of dollar amounts and percentages to support virtually any point of view - a hindrance to understanding the outcome of the session. To provide the broader picture, this briefing compares combined state and local K-12 funding provided by the 2011 Legislature - both within and outside the Distributive School Account ("DSA") - to that approved at the 2009 regular session and as now estimated after the 2010 special session. The fiscal challenges of individual districts will vary depending on the differentiation of basic support among districts and cost reductions undertaken at the local level. Such variation notwithstanding, general observations can be made based on the aggregate level of K-12 funding documented in the state's financial model which formed the basis for the final legislative appropriations.Findings in Summary
Combining all state and local revenues for K-12 education programs, school district funding is projected to decline by $612 million in the next biennium compared to the expenditures budgeted for the 2009-2011 biennium at the 2009 regular session, and by $501 million compared to the reduced expenditures budgeted after the 2010 special session.1 State basic support per student will decrease an average of $132 per student from the FY 2011 level approved at the 2009 regular session, but will increase an average of $71 per student in FY 2012 from the reduced FY 2011 amount approved at the 2010 special session.2 However, state basic support is only part of total K-12 revenue; and total funding per student will decrease in FY 2012 by $694 from the FY 2011 level approved at the 2009 special session and by $458 from the reduced FY 2011 level estimated after the 2010 special session. Such is the case because (1) the 2010 special session of the Legislature reduced FY 2011 basic support $203 per student from the level approved at the 2009 regular session, creating a lower base for comparison to FY 2012; and, (2) dramatic shortfalls in local revenue have not been totally offset by state funding. Table 1 below summarizes these comparisons.3
Understanding Nevada's system of funding schools can be challenging because public deliberations focus heavily on the 45 percent of K-12 operating funding in the state's Distributive School Account ("DSA"), while paying comparatively less attention to the other 55 percent of school revenues outside the DSA, which are also levied and monitored by the state either through dollar-for-dollar retrospective true-up, or through prospective estimates adjusted every two years. While the Nevada Plan for School Finance is described as a combination of state and "local" revenues; the reality is the state manages its aid to schools such that districts have little governance over their operating funding, other than to reduce one expenditure in order to increase another. Since there is no local taxing authority for school operations, all K-12 operating revenue, including the so-called "local" money not in the Distributive School Account is essentially state revenue. If "local" revenue is received in greater-than-anticipated amounts, the state simply reduces its current payments and future budgets, absorbing any windfalls to the credit of the state general fund. Since the open debate and the associated media coverage gravitate to the DSA, public discourse is usually restricted to sound bites addressing a state account that makes up less than half of total school funding. Accordingly, lofty pronouncements regarding increases in either state basic support per student or state general fund appropriations essentially elevate form over substance, as both these parameters are merely subtotals or remainders in the greater calculation of total K-12 funding.
Prior to the 2011 budget compromise, state basic support per student for FY 2012 was recommended by the Governor to decline from FY 2011 by an average of $270 per student from the level approved in the 2010 special session, and by $477 from the amount approved at the 2009 session.4 After the 2011 budget compromise, state basic support for FY 2012 will actually increase by an average of $71 per student from the FY 2011 level enacted at the 2010 special session. This adjustment, representing a net increase of $341 per student or $143.9 million in total funding beyond that originally recommended by the Governor, was funded with a combination of increased state general fund appropriations and Local School Support Taxes (sales), a reallocation of room taxes, offset by rejection of the proposal to use debt reserves for basic support. In combination with restoration of earmarked Class Size Reduction and other programs in place of block grants, these actions certainly place districts in an improved position to maintain education programs and to minimize layoffs. That said, state payments comprise less than half of total K-12 school resources; and, as the remainder of school revenue outside the DSA was not enhanced, districts still face significant reductions from FY 2011 levels of total funding.How State Basic Support Can Increase While Total Funding Decreases
Because the DSA comprises only a minority of total school funding, it is possible for state support to increase while other sources decrease in a greater amount - the net effect being an aggregate decrease in K-12 revenue. This is the case because the amount of money provided by the DSA is calculated backwards from the bottom line spending target determined by the Legislature for state and locally- supported K-12 school operations. As such, the DSA is not the foundation of school funding some perceive it to be, but merely the remainder amount needed to make up the difference between the total amount the Legislature wants schools to spend and the amount that sources outside the DSA will provide. If local revenues such as property taxes decline precipitously, it is possible that state support can increase markedly with no positive effect, or even a net negative effect, on total school funding. Thus, as in the 2011 budget, basic per pupil support can go up while combined funding available to students actually declines.
A review of the state's financial model which generated the statewide average basic support in AB 579 indicates that, after restoring most of the programs earlier recommended by the Governor for block grant funding, total school district outlays are now estimated at $3.166 billion in FY 2012 and $3.226 billion in FY 2013. The same model indicates actual outlays were $3.518 billion in FY 2010, and are projected at $3.375 billion FY 2011, subject to audit.5 These estimates are shown in Table 1 line 3 (page 2). In other words, despite the slight increase in state basic support per student, the Legislature has budgeted a net reduction of $501 million in total K-12 spending for the next biennium.
Table 2 (above) shows the calculation of the Distributive School Account in greater detail. In reviewing Table 2, note how the calculation of basic support begins on line 1 with total district operating expenditures, then proceeds in lines 2-5 to deduct K-12 resources "outside" the DSA and special program costs to arrive at the amount to be funded on a per-student basis in line 6, adds programs not funded on a per student basis in line 7, then further deducts revenues "inside" the formula in lines 8-14 to arrive at the amount to be provided from the DSA. The Legislature then deducts non-general fund revenue within the DSA to arrive at the final state general fund appropriation in line 17, as set forth in AB 579. While this calculation may seem needlessly arcane, its effect is intentional and highly predictive. Under this method, which has existed since the late 1970's; (1) the state determines the total amount of K-12 operating funding ; (2) no substantive "local" revenue authority exists for funding school operations; and, (3) state basic support and general fund appropriations are only residual amounts, and are not reliable indicators of total school district spending power.6Assumptions Underlying Reductions in Total K-12 Spending in FY 2012 and FY 2013
Although the state does not directly dictate the results of collective bargaining, the Legislature in fact assumes certain bargaining outcomes in its determination of K-12 funding. Basic support per student is "backed into" starting with specific payroll assumptions.
For example, the Legislature projected that, under current collective bargaining agreements, total K-12 payroll costs would have been $2.690 billion in FY 2012 and $2.744 billion in FY 2013, assuming no cost of living adjustments (COLAs) or benefit adjustments.7 To reduce K-12 funding, the Legislature instead calculated school district payrolls at reduced levels - $2.548 billion and $2.600 billion for FY 2012 and FY 2013, respectively. Hence, the Legislature cut $286 million, or 5.1 percent, from the amount of money which would have been required to continue the current salary structure without COLAs or benefit adjustments over the next two years. Subject to collective bargaining, districts can reduce pay scales and shift benefit costs to employees as assumed by the Legislature, or undertake equivalent measures to absorb this loss. As always, wishful notions that "local" funds are somehow supplemental to and separate from state funds may arise in the bargaining process, but the reality is that "local" funds have already been absorbed by the state in the calculation, and do not provide substantive fiscal discretion to districts.
Of the $501 million total reduction shown in Table 1, $489 million is assignable to regular and special education, adult high school, special transportation, and school lunch match; and $12 million to categorical programs and other adjustments. Table 3 (above) shows the origin of this $489 million reduction in the next biennium by major category.8 Note in Table 3 that the Legislature has assumed sufficient payroll cuts such that 2.1 percent fewer actual dollars will be disbursed for salaries and benefits in the next two years compared to the 2009-2011 biennium. Achieving such savings would require not only foregoing COLAs, but also step increases for years of service and/or education credits, salary reductions, increased employee contributions toward benefits, or some combination thereof. As an alternative, layoffs may be required unless equivalent measures have been or can be taken. Higher class sizes may result, depending on enrollment. In addition, the Legislature assumed substantial reductions in outlays for services and supplies, curtailment of inter-fund transactions for capital and other purposes, and reduced encumbrances of money for future outlays. Finally, school district ending fund balances are projected by the Legislature at less than three percent of annual expenditures, lower than the 5 percent balance required in the Governor's Executive Budget.9
Again, school districts have some discretion in addressing these reductions through any combination of cost curtailments subject, of course, to collective bargaining which consumes roughly 86 percent of all K-12 operating resources. However, districts have no governance over the total amount they have available to spend.Conclusion - Implications for School Districts
Although Nevada school districts adopt their own budgets, they do so within a state-directed revenue system which significantly limits local discretion. Since state support varies inversely with local revenue, Nevada's K-12 funding scheme is highly predictive of aggregate local budget outcomes.
At this juncture, it is likely most school districts have outlined alternatives for meeting these fiscal challenges, and the potential impacts are being deliberated in context of the bargaining process. Certainly, some improvement in funding for school districts was realized at the close of the 2011 session, but that improvement was against the original Governor's recommendation, not against the funding level for the biennium ended June 30, 2011.
Accordingly, school districts, their constituents, and employees should not be persuaded that the atmosphere of compromise in which final resolution took place resulted in any semblance of status quo. It is clear that, by any measure, these budget reductions are larger than those previously imposed and that districts will have significantly reduced funding in the next two years.
NOTES:View Report »
- Includes state DSA and local funding for regular and special education, adult high school, special transportation, school lunch match, Class Size Reduction, other categorical funds, and Regional Professional Development Programs (RPDP's) in separate Remediation Trust. Does not include capital project, debt service, or proprietary funds, as they are not available for instructional programs except as specified in Section 30 of AB 579; or federal funds, as their use is not determined by the Legislature. Includes expenditures, balances, transfers, adjustments and other uses of funds.
- Figures may reflect slight differences from Legislative acts due to rounding or enrollment fluctuations.
- Assembly Bill 6, 2010 Special Session of the Legislature. Also see: 2011-13 DSA workbook_Leg Approved Master DSASUMM.
- State of the State Address, Governor Brian Sandoval, January 24, 2011. Also see AB 563, 2009 Nevada Legislature.
- Source: 2011-13 DSA workbook_Leg Approved Master DSASUMM, combined with RPDP's in separate Remediation Trust. FY 2011 estimated outlays shown here do not include adjustment to FY 2011 special funding to balance to FY 2011 NRS 387 reports filed prior to the 2011 session
- Source: 2011-13 DSA workbook_Leg Approved Master DSASUMM. Note: Table 2 line 1 includes regular and special education, adult high school, special transportation, and school lunch match. RPDP's are added in line 20 to the amount in the DSA for purposes of comparability with Table 1.
- Source: 2011-13 DSA workbook Leg Approved Master DSASUMM. Payroll projections shown include regular, special and adult high school education, and are presented to illustrate the effect of collective bargaining outcomes assumed by the Legislature. Class Size Reduction, other school improvement, and categorical funds are separately allocated.
- Id. Note: This comparison is to the reduced level of expenditures projected for the 2009-2011 biennium after the 2010 special session. In Table 3, reductions by category include regular, special, and adult high school education, special transportation and school lunch match to illustrate payroll and other assumptions. Does not include Class Size reduction, other school improvement and categorical funds, or RPDP's which are separately allocated.
- NRS 353.213.
Current Economic Indicators
Convincing signs of economic recovery have yet to visit Nevada. Although tourism counts are rising, April gaming win declined 0.6 percent; and, year-to-date gaming percent fees have increased only 1.9 percent over the same period last year. April Taxable sales grew 2.3 percent, and year-to-date sales tax receipts are 4.9 percent higher with just two months left in the fiscal year. Cigarette, liquor and other excise tax collections are mixed, with little evidence of a sustainable positive trend.
In May, Nevada's unemployment rate fell again to 12.1 percent, following the largest month-over-month decline in unemployment rate among all states in April. However, this good news is tempered by the fact that total employment and total workforce have each shrunk by over 40,000 in the past 12 months, and businesses remain cautious in their hiring decisions. Nevada's 12.1-percent rate remains the highest in the nation, followed by California's at 11.7 percent.
In May, the median closing price for existing single family homes tumbled to $106,200, 13.7 percent less than last year, and 63.1 percent less than the peak level in 2007 -- again a return to 1990's pricing. New home closings now comprise only 5.7 percent of residential sales, and continuing builder caution is reflected in the fact that the number of permits issued so far this year barely exceeds the depressed number of new home closings. The commercial market awaits second quarter figures, as the previously reported vacancy rates for office, retail, and industrial space in the Las Vegas metropolitan area remained discouraging at 24.0 percent, 10.4 percent, and 17.9 percent, respectively.
Las Vegas tourist visitation continues its gradual improvement, with a 5.0 percent year-to-date advance. McCarran International Airport passenger counts have risen in the first five months of 2011, with the May count reflecting a 5.1-percent increase over last year. Concern over spending per visitor continues to linger.The Legislature - Taxes and the Budget
These observations on the last days of the session are chronological, starting on May 12, the 95th day of the 120-day session.Tax Bills Lack Votes - Long Term Tax Policy Remains Unresolved
The legislative committees that determine state spending began meeting in January, even before the legislative session began, with some legislative leaders immediately asserting that revenues were insufficient to fund needed public services. In contrast, debate on public revenue did not start in earnest until 95 days had already passed, and time was growing short. Senate Bill 491 would have imposed a business franchise or "margin" tax of 0.8 percent, and Assembly Bill 569, would have levied transaction tax on "services" at 1.0 percent. Public testimony underscored the fact that that, because businesses and their financial structures vary considerably, vetting tax measures is highly complex, requiring careful definition of taxable events, consideration of equity, attention to the mechanics of collection, and other critical factors. As always, in crafting tax policy, some key principles should be taken into account including:
Although, hearings on these bills were substantive, and committee chairs were diligent in seeking as much public input as possible, it became clear there were no trades available for new tax measures; and the most that could be hoped for was some consideration of extending the sunsets of the temporary tax increases implemented in 2009. The last posted hearing on the tax bills was May 24, leaving only two weeks before the end of the session and only a week for the Legislature to retain its prerogative of overriding a gubernatorial veto of any fiscal measures it might pass.Supreme Court Decision
On the 109th day of the 120-day Legislative session, the Supreme Court decision regarding confiscation of local government money for state purposes turned the process on its head. Although the decision directly addressed only "special" laws which tax parts of the state and not others, the Court's finding might extend to other measures having similar effect, including state diversion of Clark and Washoe county property taxes and taking school construction debt service reserves only from counties in which local voters had approved such reserves. In total, the Governor's original Executive Budget included $684.9 million in these "devices" for the next two years; which, when added to similar actions undertaken during the previous administration, represented $1.2 billion in funding at risk of loss to lawsuits.
With nearly one dollar of every five in the state general fund facing potential legal jeopardy, The Governor and a supermajority of legislators determined that the risk of passing a state budget later being found "illegal" called for previous lines in the sand to be redrawn. As a result, extension of $582 million in temporary taxes scheduled to sunset was revisited and agreed to. The arithmetic was completed forthwith, and the session ended with congratulations shared across the partisan divide. That said, the only thing that was clarified this session is that raids of local money cannot be undertaken indiscriminately; a clarification with origins in the Nevada Supreme Court, not the Governor or Legislature, the latter of which have another significant fiscal gap to bridge in the future because of the nature of their budget compromise.The Compromise Includes a Continued Structural Deficit.
Both those who supported new taxes with no sunsets, and those who supported neither new taxes nor extending the sunsets, rushed in sufficient numbers to embrace extension of the sunsetting taxes following the Supreme Court decision. Among those directly engaged in the process, acrimony became collegiality, and even some on the losing end of votes paid respects to those who prevailed. That said, dodging a bullet is not exactly a business plan. To wit:
By recasting the options available to the Governor and Legislature in formulating the budget, the Supreme Court changed the political complexion of the session and gave substantial pause to future raids on local treasuries - at least partially limiting the opportunity to continue avoiding lasting solutions to Nevada's fiscal imbalance. However, Nevada's tendency to promise services without a long-standing commitment to pay for them, and the absence of a strong state policy regarding budget reserves will continue to haunt the process unless addressed.
While these concerns were not resolved in the 2011 Session, some encouraging signs did emerge. First, whether through statesmanship or mutually felt political pressure, there was in the end agreement between the Governor and the Legislature. Second, the leadership in both branches showed a genuine desire to conclude the public business, and did so in professional fashion, without embarrassment. Finally, with the help of the Supreme Court, we are reminded that the Nevada Constitution, enacted in 1864 and amended since, provides that we must balance the state budget with taxes and assessments uniformly levied and administered. That is some progress. Now for 2013.View Report »
State Revenues Re-Projected
On May 2, 2011, the Economic Forum met to re-project revenue from major state general fund taxes. Based on recent data reflecting slight recovery in taxable sales and most other sources, but partially offset by slack in collections of gross gaming taxes, the Forum estimated that the major taxes would generate an additional $119.7 million in revenue for the general fund over the next two years. When added to the estimated impact for current fiscal year, the total rose to $217.7 million because proportionally greater adjustments were made to the current year, the majority of FY 2011 collections having already been deposited. As an extension of this process, legislative staff re-projected sales taxes received outside the general fund based on the same parameters, such that the total estimated gain became $330 million. Despite these projected gains - and they are only projected - the state's budget issues are not solved, and further reductions from current service levels are virtually certain. The estimated direct general fund gain is only 2 percent of the general fund budget over the next two years. Even if all gains from the present year are swept forward to the next biennium, the gain is barely 3 percent. When the State's statutory obligation to fund public school is accounted for - the gain is less than 3 percent. Considering that both sales and gaming tax collections have dropped approximately 22 percent since 2007, the recent progress is modest, to say the least.
Overall, the Forum gravitated to the conservative side of the estimates presented by staff of the Governor, the Legislature, the collecting agencies, and Moody's Analytics. The final result fell below the midrange between high and low estimates presented by staff, and excluded consideration of the bullish estimates presented by Moody's.
While it remains to be seen whether the economy will continue its gradual progress, it is certain that the revenue levels enjoyed by state government prior to the Great Recession will not return in the next biennium, or perhaps even the one following that.The Legislature
As the Legislature digests the adjustments to revenue, the focus now falls back on the expense side, and the related debate over raising taxes has been opened. Some legislators have welcomed the increase in estimated revenue as the final piece in funding services at a level which may be acceptable, at least for the present. However, others say the additional revenues will not sufficiently support public services.
With 33 days left in the 2011 Regular Session, a tax proposal has emerged including business franchise and service taxes, phase-out of the Modified Business Tax, and extension of sunsets. Both sides have now staked out what they want, but neither says what they might concede. On the other hand, the Governor has stated both what he wants and what he does not intend to concede - taxes. Thus far, he is the given in this equation, and virtually every scenario assumes he will back his earlier statements. Each side has always had its view of taxes versus reforms; but, heretofore, legislators who oppose or are skeptical of additional revenue have had some place to go, while supporters of additional revenue have not.
Since failure to pass a budget could lead to government shutdown, but failure to pass reforms would not, the Governor's budget is considered by some as the high ground, with reforms as a sweetener for those believing they hold the advantage.
Since the February State-of-the-State message, revenue opponents and skeptics have stood on a complete, though disputed, budget aligned with their tax philosophy, and a general agenda for reforms in collective bargaining, retirement benefits, and construction defects. This is not necessarily due to anyone's cleverness, but rather to the fact the Governor has "first serve" in the budget process. In contrast, supporters of additional revenue had not, until recently, detailed either the magnitude or the composition of a tax package, and the expenditure side of their case remains a work in progress. In highly simplified terms, a few potential scenarios include the following:
Revenue advocates pass a budget by simple majority, but revenue opponents refuse to fund it, leveraging the supermajority requirement. The regular session ends with no budget, leaving the Governor to call a special session on his terms, with no more than three weeks remaining before July 1st, when state funding will run out for state agencies, K-12, and higher education. In 2003, arguments were made that government might operate for some number of days after July 1st without state funding; but, as in 2003, both legal restrictions and cash flow issues would be raised in opposition to such proposals. The subject of continuing resolutions may arise; but, for such measures to approximate government cash flows after the temporary taxes sunset and before the Governor's recommended reallocations would take effect, spending levels would perhaps have to be set below those in the Governor's recommended spending plan. Although contingencies such as these may seem arcane and unlikely, 2003 is still vividly remembered.
In addition, any of these situations could give rise to initiative petitions, not generated by the Legislature but by interest groups, either proposing taxes which the Legislature has not enacted or seeking repeal of taxes which it has. Lately, most initiative petitions involving taxes have faltered in the courts, and have either failed or been rewritten due to legal technicalities. Unless crafted by skilled attorneys and public policy technicians, initiative petitions for new taxes are often highly vulnerable to legal challenges."Education First"
The two-thirds supermajority requirement is easily understood by even casual observers, as the vote is posted, and is not subject to interpretation. Another constitutional provision, called "Education First", is based more on semantics than substance, but still may become a factor in partisan haggling. In 2004 and 2006, voters approved Ballot Question 1, a measure ostensibly designed to prevent "holding the children hostage" by requiring that:
".....before any other appropriation is enacted to fund a portion of the state budget for the next ensuing biennium, the Legislature shall enact one or more appropriations to provide the money the Legislature deems sufficient, when combined with the local money reasonably available for this purpose, to fund the operation of the public schools......"
Some, disheartened by the legislative theatrics and the controversial K-12 funding decision by the Nevada Supreme Court in 2003, may have thought this measure could reduce political chicanery, which it has not. Others might have wishfully read "Education First" as a substantive expression of spending priority, which it is not. Since enactment, "Education First" has been an absolute non-factor, since the Legislature found it could comply merely by passing its K-12 funding bill only moments before other spending, and by deeming its action as "...ensuring sufficient funding for K-12 education..." - cosmetic compliance with a cosmetic requirement. Nevertheless, 2011 might see "Education First" emerge in the discussion.
For the legislative majority to exercise its inclinations, spending measures must be passed by June 1st, to maintain the opportunity to override a gubernatorial veto before the end of the regular session. The Constitution empowers the Legislature to determine the "sufficient" level of K-12 funding. If, hypothetically, the Governor is presented a funding bill found "sufficient" by the Legislature, but which requires more revenue than available under current law; the parties will certainly criticize each other; either for failing to approve a measure found "sufficient" under the Constitution, or for busting the budget.
While it cannot be predicted at this point whether "Education First" will play a role in the rhetoric, it is one possible ingredient in a number of standoff scenarios facing the new fiscal year July 1st.Conclusion
Raising the bar to two-thirds for approval of taxes prevents the momentary alignment of the Governor and a bare majority of both houses from raising taxes. That said, disconnecting legislative approval of spending from that of taxes creates a schizophrenic gridlock which might serve some meaningful purpose, but which is most ungainly to observe. Imagine, if you will, serving on a corporate board of directors under rules requiring a different level of majority support for adding workforce than for setting prices, with the same members voting on both.
"Education First", the other constitutional provision treated here, was presumably intended to reduce the "politics" in funding education. Instead, it has not yet fulfilled any of its promise, and it may actually fan the flames if called into play.
Though we might find either dismay or delight in the dynamics of the supermajority requirement, or the illusory benefits of "Education First", we can neither blame nor praise today's elected officials for the existence of these provisions. Rather, we should remember that both were adopted through initiative petitions overwhelmingly supported by Nevada voters; and that at the forefront of both campaigns for passage was a Nevada Assemblyman and Congressman who later served a term as our 28th Governor. In a democracy, we generally get what we vote for.View Report »
Current Economic Indicators
February 2011 gaming win decreased 6.8 percent compared to last year, and year-to-date percentage fee collections are running only 1.8 percent ahead of last year's total - a potential concern, since the state budget currently assumes a 4.4 percent increase in percentage fees. On the other hand, year-to-date taxable sales are 5.1 percent greater than in FY 2010, more than offsetting the slippage in gaming projections. If these trends hold, these two sources are together are running a scant $15 million ahead of the Economic Forum's last projections for FY 2011. Other state revenues have shown mostly mixed results. Any notions that the state's budget woes will heal solely through economic recovery should be put aside for the present. The Economic Forum meets May 2nd to re-project state revenues.
In March, Nevada's labor force grew by 10,400 workers, while the number of unemployed fell by 2,800, reducing the unemployment rate to 13.2 percent. The real good news was the addition of 13,200 jobs, hopefully signaling a reversal in job losses. Employers leading the advance in hiring were leisure and hospitality, and professional and business services. Construction employment continues to spiral downward, with little demand for new building given the profusion of low-priced existing housing and the high level of commercial vacancies. Despite some gains, Nevada's labor market is still the most challenged in the nation as measured by unemployment rate.
Closing prices for existing single family homes fell again in March 2011, reflecting a drop of more than 60 percent from peak levels, and a return to the prices of the 1990's. As a by-product, the number of new home closings declined 44 percent from the previous year, as homebuilders remain hesitant to generate new product while low-priced existing homes dominate the listings. In the commercial market for the first quarter, office, retail, and industrial vacancy rates in the Las Vegas metropolitan area were 24.0 percent, 10.4 percent, and 17.9 percent, respectively, with the latter two sectors worsening from the previous quarter as more square footage was vacated than newly occupied. Office construction in progress is heavily concentrated in government, and government-subsidized facilities; and, therefore not indicative of sustained recovery in the economy as a whole.
After declining in 11 of 12 months in 2010, McCarran International Airport passenger counts have risen in all three months of 2011, with the year-to-date total reflecting a 2.2 percent increase over last year. In addition, Las Vegas tourist visitation continues its gradual improvement, with a 4.8 percent year-to-date advance. However, spending per visitor remains a question for the long term, as gaming establishments which rely heavily on the domestic market face steep challenges, compared to those whose holdings include operations in Asia.Local Governments
Although sales, gaming, and other tax revenues appear to have halted their precipitous downward trend, property tax revenues on which local governments rely directly and the state relies indirectly are expected to continue declining through next year, in some cases by double-digit percentages. For the past decade, local revenues have been targeted by legislators seeking to augment the state budget. Often, these proposals rode on one-sided conclusions that local taxes must be more "stable" than the state's, because some local governments carried surpluses while the state faced fiscal distress. Flaws in this logic have now been exposed, as drastic declines in local property tax revenues are now locked in for future years by "caps". Preliminary local budget deliberations for FY 2012 reflect an accumulation of layoffs, labor concessions, and curtailment of services. Clark County is dealing with declines of over 30 percent in property taxes, and Consolidated Tax receipts at levels not seen since 2004. The City of Las Vegas has reduced its employee count by 20 percent since 2009 and, after tapping reserves and capital programs, still faces a structural deficit next year requiring more cuts. Henderson has reduced non-public safety positions by 17 percent, reduced management compensation, and has cut a cumulative $90 million from its operations to meet a 26 percent reduction in property tax revenue since 2009 and a 29 percent drop in Consolidated Tax since 2006, with more reductions to come. North Las Vegas' routine budget hearing has morphed into multiple town hall meetings to address a deficit amounting to 17 percent of its budget. The City of Reno has seen its pursuit of growth turn to circumstances so grave that supervision of its fiscal affairs may be taken over by the state.
Now that local revenue streams have proven no less vulnerable than the state's, the reasoning by those supporting diversion of local money has evolved to a simple, "It's there. We need it. Let's take it."The Legislature
Although about two-thirds of the 120 day session is in the rear view mirror, it cannot be said the Legislature is two-thirds of the way toward completion. Legislators and lobbyists compare every session to its predecessors in terms of the challenges at hand - recalling events such as the "Tax Shift" of the 1980's, calls for a "broad based business tax" in the 1990's, and the tailspin of 2003. The 2011 Legislature will surely take its place among those memorable sessions as a colossal collision of philosophies.
The fact that Nevada has the largest percentage budget deficit in the nation, when compared to the 2009 spending plan, has made the pieces of the fiscal puzzle impossible to assemble in the world as we have known it. As a result, each of the opposing sides has created its own puzzle, galaxies apart in size and composition - one widely circulated, balanced with more expenditure cuts and confiscation of funds earlier promised for other purposes, and allowing current taxes to be reduced: the other, a work in progress which tacitly targets restoration of the 2009 spending plan, with some cuts, and which pursues "revenue". We have little time before the beginning of the fiscal year to find out whether resolute "shared sacrifice" will lead us to a new reality, or outrage over what may become the lowest per-student funding in the United States will win the day.
Nevada's budgeting system provides considerable leverage to the Governor; who, on delivery of the Executive Budget, has first serve in the contest; who prescribes the agenda for special legislative sessions; and who, if positioned against revenue measures, is backed by the constitutional two-thirds legislative supermajority requirement. These mechanics can be advantageous to any Governor, but especially so if the executive sentiments lie on the prevailing side of the supermajority threshold.
In past sessions, compromises have been struck through "splitting the difference" on spending and taxes, exchanging votes on bills, and strategic distribution of "pork" appropriations. Though some may see these tools of legislative compromise as unsavory, they can facilitate closure if opponents are close enough to see each other. However, the 2011 participants are nowhere near one another on policy, and arguments over the definition of "cut" persist; based either on what was, what is, or what otherwise would be. The only two things confirmed so far are that the same numbers, selectively presented, can be cited as supporting virtually any point of view; and that paying ongoing expenses with non-sustainable funding sources has not entirely lost its appeal.
It is not easy to write a screenplay "splitting the difference" between a world with no sunset revenue extensions and no new taxes; and one with anywhere from $1 billion to $2.5 billion in sunset extensions and new taxes, especially when one side says, "Will not trade..." The supermajority requirement will not only be the pivot point for a vote on revenue, but may also draw other key issues into its vortex - collective bargaining, pensions and postretirement benefits, education reform, vouchers, tuition increases, private school funding, construction defects, and others. The choices will be harsh, as the currency of legislative compromise has never been so scarce. There is no money for "pork", no property taxes for new buildings; and the prospects for exchange of support on critical bills may have been chilled by unflinching, high-stakes pronouncements made early in the session.
As of this report, 43 bills have been introduced proposing changes to Nevada's economic development policy, many involving grants, tax abatements, or loans. Some measures envision reorganization of state agencies involved. Some would allocate funds for lending to targeted subpopulations or for venture capital endeavors. Some would assist certain industries or offer tax abatements in areas meeting unemployment criteria. While, in concept, all deserve a fair hearing, both the underlying premise and the details of each bill should be vigorously questioned. Since these measures are largely speculative, firm estimates of fiscal impact are often sparse; and forecasts of economic benefit by those who would administer or receive these funds may, in some cases, be optimistic. These bills are now undergoing the usual legislative process of competing analyses, turf struggles, and pleas by potential beneficiaries; and the result will likely be no more than very few bills, hopefully with prospects for success in advancing the economy.
Closing this legislative session will be a monumental challenge for policy-makers seeking to either hold or change votes. It remains to be seen whether the needle is somehow threaded to arrive at a solution. So far, the needle has no hole.View Report »
For decades, as Nevada's economy was growing robustly, local governments faced steep challenges in serving rapidly increasing populations and expanding residential and commercial development. The public discourse revolved around where growth was occurring, and how to meet the need for public services. Accordingly, the formulas for distribution of public revenues came to be based on expectations of overall economic expansion, with less attention given to the possibility that growth and decline might one day occur simultaneously in different areas within a single county.
Since 2007, property values have collapsed, population growth has faltered, and local governments have faced severe revenue shortfalls in attempting to meet continuing demands for services. Now, in 2011, the unintended consequences of a revenue distribution formula driven almost entirely by population and property growth have manifested themselves because most urbanized areas of Clark County are experiencing negative growth, while some others have modest positive growth, a circumstance not fully envisioned in the current formula used to distribute sales taxes, cigarette taxes, liquor taxes, motor vehicle registrations, and real property transfer taxes within each of Nevada's counties. Together, these taxes are referred to as Consolidated Tax, or C-Tax.
C-Tax distributions account for an average of 33.4 percent of general fund revenue for local governments in Clark County. Given the importance of these revenues, projections for their distribution in the ensuing year are critical in establishing local budgets. Preliminary estimates now show that FY 2012 allocations to several local entities in Clark County will be significantly disproportionate to their actual rate of growth, due to provisions in the distribution formula, intended to make the allocations more growth-sensitive, but which are now seen as potentially destabilizing the distribution. This is the case because each entity is assigned its own growth index, and those indices are summed un-weighted, without any relationship to the size of any entity or its historical revenue base. In some instances this can result in a single small, but growing entity in the midst of much larger, but slightly shrinking entities, receiving the majority of all revenue increases throughout the county. For example, if total Clark County C-Tax rises only 2 percent in FY 2012, the City of Mesquite's allocation could rise 141 percent. The possibility of such extreme outcomes has prompted reexamination of formula changes enacted in 2001.
To assist in examination of the issue, this paper offers a brief history of the current formula; demonstrates, in simplified form, the operation of a key component of the present method; and offers observations on policy going forward.Brief History
Prior to 1997, six major tax revenues were distributed among local governments under a variety of different formulas. These taxes include the Basic City-County Relief Tax (sales), the Supplemental City-County Relief Tax (sales), Government Services Tax (motor vehicle), Real Property Transfer Tax, and taxes on cigarettes and liquor. These revenues were each distributed under different methods, based in various ways on population, legislative calculations, the number of cities in a county, or in proportion to the distribution of other taxes. This piecemeal approach resulted in radically different percentages of each of these revenues being distributed between a county and the cities therein, a somewhat counterintuitive situation which generated debate among local governments.
In 1997, a legislative study committee, assisted by an advisory group of finance officers, proposed consolidation of these revenues into a pool for each county, with the distribution to take place according to a single formula. The proposal passed in 1997 as Senate Bill 254, and the Consolidated Tax or "C-Tax" distribution became effective in FY 1999.
On its face, the notion of C-Tax is simple: pool the combined revenues and distribute them according to the relative growth rates of each entity - county, cities, towns, and special districts. The execution, however, has not been so simple. In 1997, to assure that no entity would instantly lose revenue in the new distribution, the Legislature established a starting point or historical "base" level of revenue to be allocated from the combined taxes from the first year of operation forward. In addition to "base" revenue, "growth", or "excess" revenue would be then be allocated according to an index including increases in the population and assessed valuation of each entity, excepting certain special districts. The intended result, then, was that entities would start "revenue neutral", and be rewarded for their growth going forward.
Pursuant to one of the objectives stated in the legislative study, to "discourage competition among entities for funding", the first C-Tax growth factors were geared toward stability of revenue distribution, as opposed to immediate and episodic response to such events as jurisdictional annexation or major spikes in population. This stabilizing feature came to be known as "one-plus", after the legislative language prescribing its mathematical calculation. "One-plus" is discussed further in another section of this briefing.
In a general sense, the terms "base" and "growth" are easily grasped. But, since 1997, various local governments have sought to change the formula, and every such case has centered on the definition of these two key terms."Base" Revenue
"Base" revenue is generally the amount of money received in the previous year, adjusted for CPI, or a pro-rated amount thereof in years of overall revenue decline. However, some entities have sought, and in one case received, legislative adjustments to their prior year "base", in effect awarding them with a revenue advantage in perpetuity. Such base adjustments increase the floor allocation going forward by artificially overriding an entity's actual revenue history with a "plugged" number, thereby increasing the entity's starting point for the next year's allocation, and for every year thereafter. Significant examples of adopted and proposed base adjustments include:
Other, less-controversial amendments to C-Tax have been implemented over time, generally trending toward multi-year treatment of population and assessed values, and addressing circumstances specific to mining counties."Growth" Revenue
"Growth" revenue is essentially the amount received in a year in excess of the amount received in the prior year. The countywide total amount of growth revenue is realized in finite dollars, is reconcilable at year's end, and has therefore not been subject to dispute within a county. However, what is periodically disputed is the calculation of the growth index for each entity, which is used to weight the distributions within each county. C-Tax "growth" revenue is generally allocated according to the proportion which each entity's growth in population and assessed valuation bears to the total of the indexes of all entities within a county. The most controversial feature of this calculation is referred to as the "one-plus" language.
When C-Tax was first enacted in 1997, the index for each entity was calculated as, "one plus" the combined percentage increase in population and assessed valuation of the entity. Therefore, an entity with a combined population and assessed value increase of 5 percent would be assigned a factor of one plus 5 percent, or 105; and an entity with a combined growth factor of 15 percent would have a factor of 115. Under one-plus, the proportional relationship between 105 and 115 then drives the distribution. Without the "one-plus" language, the proportional relationship would be that of 5 to 15, with a vastly different outcome as in Tables 1 and 2, showing a hypothetical distribution of $5.0 million in growth revenue between three differently -sized entities, both with, and without "one-plus".
Tables 1 and 2 illustrate two phenomena pivoting around the inclusion or exclusion of the "one-plus" language.
Now, as we approach FY 2012, it is expected that a very slight overall increase in C-Tax revenue will be distributed among Clark County local entities based on their relative growth percentages, once again without the "one-plus" factor or other stabilizer. The difference today is that some large urban entities now have negative percentage growth factors, primarily from drops in assessed value, and the mixed pattern of growth and decline throughout the county is such that some smaller entities are projected to receive C-Tax revenue increases in percentages vastly disproportionate to their size and budgets, due to the formula factors illustrated in Tables 1 and 2. This is an unintended consequence of the formula's design, which did not contemplate the hyper-growth in sales activity that occurred during the late 1990's and early 2000's much less the nation-leading rates of decline witnessed during the past few years.
There are at least two bills regarding C-Tax before the 2011 Legislature - one simply requesting a legislative study; another also requesting a study, but accompanied by an adjustment in base revenue; neither which proposes reinstatement of "one-plus" or any variation thereof. The City of North Las Vegas is now supporting Assembly Bill 71, requesting only a study. The City of Fernley is supporting Assembly Bill 47, which seeks both a study and a $5.0-million base adjustment.Policy Considerations
Ironically, if the "one-plus" language were reinstated today, these anomalies would not be taking place. This, however, should not be construed as a conclusion that simply reinstating the "one-plus" factor is necessarily the ultimate remedy for the C-tax distribution's dual challenges - making the formula sufficiently responsive to relative changes among entities while avoiding grossly disproportionate outcomes. As shown in Tables 1 and 2, the percentage increases in revenue allocated can vary wildly from the actual percentage growth of an entity. In the hypothetical Table 1 and 2 examples, we see that an entity growing three times as fast as another can receive virtually the same amount of growth revenue in dollars, and more than tenfold the percentage increase, even with "one-plus". Also in Tables 1 and 2, we see how an entity growing only three times as fast can receive a percentage revenue increase more than 28 times that of the slower-growing entity without "one-plus". Although these are hypothetical examples, the range in size among Clark County local entities make such massive variations possible.Potential Approaches
The primary near-term concerns are the unintended consequences of completely decoupling population and assessed valuation growth from the level of either the base or the incremental "growth" revenue. Since these anomalies are on the immediate horizon, some action should be considered at this time. For discussion purposes, a number of avenues including, but not limited to, the following might be considered:
More directly tying the allocation of growth revenue to the actual percentage growth in population and assessed value through a cap or other constraint - For example, if a two-tiered approach were taken wherein the first distribution is calculated without "one-plus", letting growth dollars flow to growing entities, but limiting the increase in revenue to a percentage more closely related the actual percentage growth of the entity; growth revenues could first go to those logically justified in receiving them, but in closer proportion to actual growth, not in excess of it. Any growth revenues not consumed in the first tier might be reserved for a second tier calculation, this time based on "one-plus" or other stabilizer, which would tend to provide continuity to the remainder of the distribution.
Some form of "circuit breaker" or set of conditions under which an alternative formula is applied if extreme outcomes would otherwise result - Critical in such an approach would be establishing those conditions, as beneficiaries of the existing formula might consider any expected windfall as being legitimately due them, and not extreme or inordinate. Some consideration might be given to reverting to the one-plus provisions as is allowed under certain conditions in mining counties. However, "one-plus" can also produce revenue outcomes not exactly related to growth of an entity. For example, it has been estimated that if "one-plus" were re-implemented under the above assumptions, Mesquite's allocation would increase only 2 percent when their combined growth of population and assessed value is nearly 9 percent - certainly not nearly as disproportionate as under the current language, but not exactly a perfect fit for their actual growth. In addition to seeking a reasonable proportionality between growth and revenue, the potential downside of creating revenue incentives for entities to pursue growth for its own sake should be carefully considered.
Suspension of the existing formula, possibly accompanied by a sunset provision, and substitution of an interim distribution while further study is undertaken toward a long term-solution - Existing legislative proposals for studies might be accompanied by an interim formula, designed to stabilize distributions, while further study can be accomplished and a long-term solution crafted.
As these near-term issues are addressed, it is important that a full range of scenarios be considered, and that careful observation be made of the interaction between proposed alternatives and other standing components of the C-Tax formula such as calculation of the ongoing base and treatment of special districts. As always, any deliberation of formula changes should be conducted cautiously, to avoid unanticipated consequences, and exploration of solutions to the present dilemma should not be seen simply as an opportunity to revive previous proposals. Finally, since C-Tax is a state-wide formula, scenarios should include other counties of various sizes and jurisdictional compositions.
Any of the above approaches, combinations thereof, or other avenues could be pursued. Virtually every local government tax in Nevada has undergone changes in distribution, and most such changes have drawn at least some controversy. Therefore, reaching even an interim solution may be somewhat challenging.Conclusion
Ideally, formula distribution of revenue should be generally proportional to the relative scale and levels of change among the affected entities. No formula is perfect, and the definition of "equity" is likely to remain somewhat in the eye of the beholder. That said, under present circumstances in Clark County, it is clear the current C-Tax formula can distribute growth revenue in a fashion vastly disproportionate to an entity's rate of actual growth. The reasons for inclusion of the "one-plus" language in the original C-Tax legislation are perhaps more widely understood today than when that language was repealed, and some form of stabilizer or formula modification to limit counterintuitive outcomes might be considered.View Report »
Current Economic Indicators
November 2010 taxable sales increased 2.7 percent over last year. November gaming win decreased 5.9 percent over last year, but year-to-date percentage fee collections are running 2.5 percent ahead of last year's total. Both indicators have shown tenuous stability in recent months.
The statewide December 2010 unemployment rate was 14.5 percent (seasonally adjusted), still highest in the nation. Over 170,000 jobs have been lost in the last two years, of which 52,000 were in construction and 31,000 were in leisure and hospitality.
In commercial real estate, office, retail, and industrial vacancy rates remain at all-time highs in the Las Vegas metropolitan area at 24.2 percent, 10.2 percent, and 16.9 percent, respectively, virtually unchanged from a year ago. On the residential side, demand for new construction remains low. In 2010, new units comprised only 9.6 percent of closed sales, a far cry from 2005, when new units represented 41.4 percent of sales. Year-end 2010 figures show no material recovery from 2009 lows; either in sales of new units or in median closing prices. Home equity position has continued to decline, with an estimated 66 percent of mortgages exceeding property value.
Las Vegas tourist visitation and McCarran International Airport passenger counts have stabilized somewhat, but have not recovered from their precipitous decline, which began in 2007. November 2010 visitation rose a scant 1.0 percent over the same month in 2009, while McCarran International Airport passenger counts fell 1.2 percent for the same period.Governor's Proposed Budget
State general fund revenue is projected at $5.3 billion over the next two years - $1.2 billion less than the spending of $6.5 billion approved by the 2009 Legislature. The $1.2 billion figure has been cited by some as the "deficit" which the Legislature must address. However, direct state general fund revenues and expenditures are only about 40 percent of the budget; and all-inclusive estimates of the total deficit exceed $2.0 billion including all state and school district funds, and the loss of federal stimulus. School district funds must be also included in calculating deficits because funding K-12 is a legislative responsibility under the Nevada Constitution.
Accordingly, the Governor has recommended more than $2.46 billion in extraordinary fiscal measures, all of which require either approval or some alternative action by the Legislature to balance the budget. Major examples are:
Legislative hearings can be hard to follow, with distinctions between sources and uses of funds lost in rhetoric. The listing above is not all mutually exclusive, as a minor portion of the net general fund budget cuts is enabled by salary reductions and county funding outside the state general fund. Nevertheless, by any reckoning, the fact the Governor's budget includes over $2.0 billion in "fixes" requiring legislative action indicates the magnitude of hard decisions to be made.Nevada Exceptionalism - The Myth
Historically, we have been confident we control our fiscal destiny; but we may be drifting toward budgeting by default. Education attracts media, but Health and Human Services has prevailed in funding decisions - a fact not widely discussed. Health and Human Services expenditures have grown from 24.8 percent of general fund spending in FY 2001, to 29.4 percent in the current biennium, and are recommended by the Governor to rise to 32.8 percent in the next two years, a migration of $467 million in just a decade, even including rate reductions to medical vendors. A surge in costs should be expected in the Great Recession, but this shift of dollars started in the 1980's, when human services hovered near 20 percent of general fund expenditures.
This is not intended to suggest that Nevada spends too much on human services; rather, it suggests Nevada's population, like those of other states, is increasingly reliant on government assistance for health care. To offer orders of magnitude, by FY 2013 it is projected that 308,000 Nevadans will be enrolled in Nevada Medicaid (better than 1 in 10 residents), while statewide K-12 enrollment will be 424,000 students, with the former population increasing far faster than the latter.
The rationality of Nevada's state budget process has suffered as much from the short-term remedies administered to it as from our narrow tax base. We have so far neither reduced expenditures nor raised revenue sufficiently to achieve sustained equilibrium. The Governor now recommends the budget be balanced largely with pay reductions throughout education; sweeps of debt funds and general fund borrowing which "kick-the-can"; devolution of state responsibilities to counties, and other transfers.
Votes are already being counted as the Legislature, or two thirds thereof, begins determining whether this budget offers public services sufficient to attract new business growth and remake the state's economy. An economy which once evoked self-congratulations; but, at present, seems more a perennial concern.View Report »
Current Economic Indicators and State Revenues
Taxable sales for September 2010 increased 2.1 percent over last year. However, adjusting for sales reported under taxpayer amnesty, the year-to-date gain was virtually zero. September gaming win increased 0.7 percent over last year, while year-to-date percentage fee collections are running 2.0 percent ahead of last year's tally for the same period. While neither of these indicators is cause for celebration; both are showing potential signs of having stabilized, and are performing slightly better than earlier projected. So far this fiscal year, double-digit declines have given way to flat performance or modest single-digit increases.
Nevada's unemployment rate remains the highest in the nation. For October, state-wide unemployment fell slightly to 14.2 percent, while Clark County's rate dropped to 14.1 percent; but these reduced unemployment rates can be traced to monthly declines in the total labor force. Construction remains dormant, as closings of existing homes have outnumbered those for new homes tenfold, and commercial space continues under-occupied with vacancy rates of 24.0 percent, 10.7 percent, and 16.6 percent respectively for office, retail, and industrial space in the Las Vegas market.
September tourism indices continue to reflect a combination of slight growth in visitor volume at 2.0 percent, coupled with a decline in McCarran International Airport passenger counts of 2.0 percent. The lag in air travel to southern Nevada remains a concern in terms of its influence on tourist spending.
By the time of this release, the Nevada Economic Forum will have projected state general fund revenue for fiscal years 2012 and 2013. The projections of the Forum, however, are only one piece of a much larger puzzle encompassing state expenditures and deterioration of the property tax base.The Expense Side of the State Budget
The state's one-time fund sweeps, reliance on non-recurring federal aid, and risk of litigation and public backlash in diverting local funds have been widely publicized. Equally important are the appropriations for expenditure - the three largest being K-12 Education, Human Services, and The Nevada System of Higher Education (NSHE). Nevada's K-12 operating expenditures per student were already among the lowest in the nation, even before recent cuts, and issues of low student achievement are certain to arise in a debate over funding and systemic reform including school districts, unions, and business groups. Human services budgets being inherited by Governor-elect Sandoval include massive cuts in personal care, hospital and nursing home rates, psychiatric, and other services - sure to bring crowds of health care providers and beneficiaries to the table, with others, including insurers, also likely to weigh in. Finally, NSHE has undergone significant budget-driven turmoil, and fundamental questions have emerged as to whether Nevada's long-standing model of legislative control over NSHE's fiscal matters is healthy for a system, which should be pivotal in reshaping our economy. Each of these three institutions struggles with deficits in service level and performance; and ignoring these programs, comprising 84 percent of the state general fund, would be a serious mistake.Property Tax - the Third Leg of the State Budget
Property taxes are not often discussed as part of the state budget, because they have not been directly deposited to the state general fund until recently. However, they are critical in terms of cost avoidance to the state, and are emerging as yet another headache for 2011. The state uses property taxes to pay its general obligation debt, avoiding general fund cost. In addition, the state uses property taxes "off-budget" as offsets in meeting its obligation to public schools. Finally, since 2007, the state has been skimming local government property taxes to fund the state budget. In total, the state and the school districts for which the state is responsible claim -- through direct collection, cost avoidance, local revenue diversion, voter approval, or indirect allocation -- 46 percent of all property taxes paid. For public school operations alone, the state is counting on $1.45 billion in property taxes this biennium. If this revenue falls short, the legislature has to decide whether to meet its "guarantee" to public schools by making up the difference, or rescind its K-12 funding, and let schools take the hit.
Prospects are not favorable. Property tax revenues are now projected to be 16.7 percent less than last year, compared to the Legislature's estimated 8.7 percent decline, representing another $20.3 million problem for the state to address by either raising other revenue or reducing K-12 further. The same effect cascades into the state's ability to finance capital improvements, as the proportional shortfall in its debt fund represents $13.8 million less than projected. Leveraged annually, this amount represents a loss of $150 million in capital improvement financing, another blow to the state's debt-reliant infrastructure program. Finally, the Legislature's pursuit of local property taxes to solve its revenue issues now faces property values, which have recently dropped faster than either sales or gaming tax revenues, and are unlikely to rebound in the near future. Where, then, will the state turn?View Report »
Current Economic Indicators and State Revenues
Taxable sales for May 2010 decreased 1.9 percent, while May gaming win decreased 4.1 percent over the same month last year. It is hoped by all observers that the slight decrease in May taxable sales, following April's narrow increase, foretells an end to the profound declines experience through most of FY 2010. That said, however, year-to-date taxable sales are still down 11.9 percent, barely higher than the 13.4 percent decline projected as of last February's Special Session of the Legislature. Hypothetically, if June sales are flat, followed by a modest 2 percent increase through FY 2011, the state general fund could gain $100 million in sales tax revenue compared to the projections on which the 2010 special legislative action was based, and more if year-over-year increases are higher. However, it is yet to be seen whether the relative stabilization over the last two months constitutes a trend, so this glimmer of potential good news is but cold comfort. On the other hand, gaming revenue has so far not shown convincing signs of recovery; and many parts of the state budget remain speculative or negative, including whether federal matching funds will materialize as assumed, whether stimulus money will be renewed by Congress, how much the tumble in property values will cost the state in plugging yet another hole in K-12 school budgets, and how the courts will rule in the litigation over Southern Nevada Clean Water Coalition (SNCWC) funds sought by the Legislature for state purposes, but still held by SNCWC pending the outcome of that litigation.
The recent lessening of declines in taxable sales begs questions of sustainability, and Nevada's jobs statistics do not suggest improvement in residents' spending power. State-wide, June unemployment rose to 14.2 percent, with 14.5 percent unemployed in Clark County. Total jobs declined by 1,400, with slight gains in the private sector more than offset by declines in season al government employment. Total employment is down 26,300 since June 2009. Construction remains depressed; and prospects for near-term improvement remain slight, with commercial vacancy rates of 24.1 percent, 10.4 percent, and 16.2 percent respectively for office, retail, and industrial space in the Las Vegas market.
Southern Nevada tourism indices were roughly flat in May. Las Vegas visitor volume and McCarran International Airport passenger counts were up 2.0 percent and down 1.6 percent, respectively. While the leveling in visitation statistics may signal the end of the worst declines, it should be remembered that total visitation and airport passenger counts are down 3.5 percent and 17.0 percent, respectively, over the last three years during which the Great Recession has affected Nevada.Where Is The Legislative Tax Study?
Attempting to find solutions for Nevada's fiscal problem, The 2009 Legislature launched another study of Nevada's tax system, including development of a quality-of-life vision for the state, supervised by a subcommittee of the Interim Finance Committee of the Legislature. The factors to be considered include impact to businesses. Moody's Analytics was appointed study consultant; and a Vision Stakeholder Group representing various interests was selected and has held nine meetings, the last on May 14, 2010. The Legislature called for the consultant to deliver its findings by July 1, 2010. That date has now passed; and the consultant has been found in default. At this point, even if the objectives of the study are achieved through alternate means, the timetable has now been pushed toward the 2010 general election and the 2011 Legislative Session. Understandably, some candidates for office may be relieved by this delay, as more timely completion might have pressed them to announce specific positions on taxation and expenditures. However, in the larger sense, any unexpected hesitation in resolving Nevada's fiscal issues is not good news. The study was intended to provide observations on both the level of public services, and on revenue structures which could fund such services, taking business climate into account; but, so far, no findings on public services, "quality- of-life", revenue options, or business climate are available for debate.
With the study schedule slipping closer to the election; and with no Governor or Governor-Elect as yet charged with presenting a balanced fiscal plan, Nevada's fiscal future remains grim. Though some additional revenues have been recently tallied, the underlying structure of the state budget is not materially improved. As reported previously, the combination of weak revenue collections and the fact the budget contains numerous measures which are either scheduled to sunset, or beyond the state's control has led to deficit projections approaching or exceeding $3 billion in a biennial budget of $6.6 billion. Even under a mindset of politically suspended disbelief, wherein re-enactment of taxes and furloughs which would otherwise expire are not considered tax increases or service cuts; the remaining deficit could still be $1.5 billion, with no further federal stimulus in sight and no other state funds to raid. If revenues are collected at levels above projections, the deficits might be reduced. However, uncertainty remains regarding a number of extraordinary measures used to paper over the "hole", including the as-yet-undetermined availability of $88.5 million in federal Medicaid matching money and the outcome of litigation over $62.0 million in sewer connection fees diverted by the legislature from the Southern Nevada Clean Water Coalition.
By any reckoning, restoring state services to 2009 levels will involve measures subject to Nevada's constitutional two-thirds supermajority requirement; presenting challenges to both those sometimes deleteriously referred to a "tax consumers", and to conscientious taxpayers concerned with efficiency in government and stability and fairness in our tax system. Uncertainty abounds for both groups. The endgame comes down to two-thirds.View Report »
CURRENT ECONOMIC INDICATORS
Taxable sales for February 2010 declined by 4.5 percent, and February gaming win increased 13.9 percent compared to the same month last year. While taxable sales were slightly higher and gaming win was substantially higher than the projections on which action by the recent Special Session of the Legislature was based; it should be remembered that year-to-date taxable sales are down 14.1 percent and gaming percent fee collections are down 5.2 percent from the previous fiscal year. Gaming win can vary substantially from percent fee collections for the same month; as special events, such as February's Chinese New Year, fall into different months depending on the year. February Las Vegas visitor volume and McCarran International Airport passenger counts were down 0.1 percent and 6.2 percent, respectively, reflecting continued restraint in the tourism sector. Although monthly decreases in sales and tourism have moderated, public entities are increasingly concerned about the third leg of Nevada's tax system - property tax. Values not seen in more than five years for residential and commercial property are expected to push ad valorem revenues in some Clark County's local governments down by as much as 20 percent next year. Nevada's unemployment rates at the end of the first quarter were 13.4 percent statewide and 13.8 percent in Clark County, both representing increases from the prior quarter. Nevada's unemployment rate remains second highest in the nation behind Michigan. A total of 19,300 jobs were shed during the quarter, of which 7,900 were in construction and 5,500 were in trade, transportation and utilities. The leisure and hospitality sector remained relatively stagnant, contracting by 200 positions quarter-over-quarter.February 2010 Special Legislative Session
This session ended more peacefully than it started, as both the Governor and legislators might have been subject to criticism had the session continued longer. However, there is still no meeting of the minds over Nevada's future. The relative harmony with which the budget shortfall was temporarily addressed does not mean the budget gap is closed. The estimated $888 million shortfall was met with $305 million in expenditure reductions; $82 million in re-projected revenues, primarily from mining; $317 million in state and local fund sweeps including the controversial taking of $62 million in Southern Nevada Clean Water Coalition money and $25 million in Clark County School district capital funds; $114 million in federal money, $53 million in "fees" (not called taxes); a speculative $10 million windfall from tax amnesty; and $7 million in other adjustments. While, on paper, these remedies equal the shortfall, they arise mostly from one-time events and diversions, not from reliable revenue streams, and any attempt to replicate their occurrence in the 2011 Legislative Session is likely to fall into the same maelstrom as tax increases, directly or indirectly subject to Nevada's two-thirds supermajority requirement.Legislative Tax Study Update
The Vision Stakeholder Group held its seventh meeting April 6, 2010. In prior meetings, members offered their individual visions for Nevada's future. While, some of the earliest suggestions from the Group may have mixed visions with goals and strategies, further efforts in organizing these diverse inputs has yielded a preliminary working document for discussion of strategies to fulfill a set of major goals, which are set forth in the draft as follows:
In the preliminary working document, strategies have been grouped according to themes such as maximizing federal funding; diversification of the economy, tax, and revenue structure; encouraging IT innovation; public-private partnerships and intergovernmental collaboration; and workforce training and employee retention. Statistical benchmarks are also being considered for adoption as measures for achievement of goals in 5, 10, and 20 years. The pace of the Vision Stakeholder Group has been deliberate, and the recent appearance of working documents intended to focus the discussion is notable. Another meeting is scheduled for May 14, 2010. The final report including revenue options is required to be submitted by the study consultant, Moody's Analytics by July 1, 2010.Prospects for the 2011 Legislature
To outline the severity of the problem facing the 2011 Legislature, if the level of expenditure approved by the 2009 Legislature was again approved without increase in 2011, including continuation of service cuts adopted before 2009, the 2011 Legislature would need to raise revenue to replace $1.1 billion in sun-setting taxes, fees, and borrowing authority, replace $541 million in federal stimulus funds as yet not available after FY 2011, replace $219 million in room taxes required by initiative petition to be transferred to a special K-12 fund, replicate the $888 million effect of actions taken at the recent special session, and continue $504 million in payroll reductions representing furloughs and larger K-12 class sizes. The fact that so much of the current budget is paid for by temporary measures, coupled with the reality that many cannot be repeated or are beyond the state's control has led to projections of a deficit approaching or exceeding $2.5 billion in a biennial budget of $6.6 billion. Indeed, the sum of items listed above exceeds $3 billion. Although some revenue growth in existing revenue streams is expected to offset this deficit, offsetting increases in caseloads and the restoration of spending cuts, including public employee furloughs, could easily push the resulting shortfall above the baseline estimate.View Report »